A Deed In Lieu Of Foreclosure vs. A Short Sale - The Bills.com Blog

I have situation when my mother passed away and her home has a reverse mortgage. Somehow my brother who was living with her in the same home also has his name on the title but not on the loan. What is the best way to settle this, we are thinking of a short sale but a friend suggested us to do Deed in lieu of foreclosure. Since this is a reverse mortgage loan, from what I am understand, the lender will be responsible for all expenses incurred on short sale the home. Is that correct? Will my brother be held responsible for anything related to short sale or can the lender go after him to collect the different of sales? Thank you for your advice.

My condolences on your loss. You do not mention when your mother died, but based on the context of your question I will infer it was recently. Accordingly, I recommend you speak with the executor (if she has a will) or administrator (if she died intestate) of her estate to determine the rights of your brother regarding the property. The fact he "has his name on the title" does not imply he now owns the property outright. Your first job is to learn exactly what rights your brother has. Do not accept "My name is on the title" as an answer because that answer has little meaning. Second, you need to speak with an attorney about the exact wording of your brother's name on the title, and what it means for your mother's estate. If your brother now owns the property completely (in lawyer-speak this is know as "fee simple absolute") or is a joint owner with an heir named in your mother's will or is merely a tenant for a set number of years, either of those rights of possession (and there are many other possibilities!) will have an impact on an analysis of how to resolve the reverse mortgage. Accordingly, I won't speculate on whether you should choose a deed in lieu or a short sale, or on your brother's liabilities because those questions are wildly premature.

Bill, I need some advice. We own a property in another city and have been having a property manager take care of it. Recently our renter just lost her job and cannot make the mortgage payment. In this down economy we cannot make the payment either. We don't know what to do and we fear we may be facing bankrupsy. What shout we do?

You need to look at the total situation to decide your course of action. Is the rental in an area where an economic recovery will happen quickly or will lag behind the rest of the economy? How is the neighborhood where is property is located? Is the school system desirable? Does the property manager give any estimation on time to re-rental? Do you have equity in the property, and if not how upside down are you? How secure are your jobs? Have your mortgage providers shown any willingness to work within the Making Home Affordable initiative? I think if you answer some of these questions your course of action will be clearer.

My home has been on the market since Feb09. My real estate agent is pushing for a short sale and does not want me to proceed with a deed in lieu of forclosure, but the last offer on my home was back in July09 and fell through due to financing. I have already moved out of the house, have not made a mortgage payment on the house since March09 and I really just want to get it off my hands. Would you suggest that I go for the deed in lieu now before we roll over into another tax year or will the taxes not be an issue either way? Just FYI: I have already decided to file bankruptcy once the home is sold in short sale or deed in lieu.

Would it be best financially or for tax purposes, to file bankruptcy the same year as you do a short sale or deed in lieu of forclosure or does it not matter if they are done in two separate years(ie.short sale in 2009, bankruptcy in 2010)?

Josie: I will combine the answers to your questions here. By definition, in a short sale the creditor agrees to forgive the deficiency balance. That is not necessarily the case in a deed in lieu of foreclosure. Review a deed in lieu carefully before signing it so that you understand all of its terms and conditions. If the document is unclear to you, it is money well spent to ask an attorney in your state review it so that he or she can take the time to explain your rights and liabilities. Also, in many states, a deficiency balance cannot be collected on first mortgage. Again, your state's recourse/non-recourse rules are something to discuss with an attorney. In terms of tax implications regarding filing a bankruptcy in 2009 or 2010, that's something to discuss with bankruptcy attorney in your state. Based on what you've written above, I don't see an advantage or disadvantage for you delaying a bankruptcy filing. However, I am not aware of your whole financial situation, and there may be significant facts that change that conclusion.

My home has been on the market since Mary 2009. It is listed at $340K, and I owe $313K. I have recieved NO offers. I would like to seek a Deed in Lieu. If the bank agrees is there a need to file bankruptcy if I can afford to pay my other debts? Also, what is the typical criteria that the bank will use to approve a Deed in Lieu?

Each lender has its own rules for approving a short sale or deed in lieu. The typical requirements are a) the residence must already be on the market for a certain number of days (90 days is typical), b) there can be no liens on the property, c) the property cannot already be in foreclosure, d) the offer of a deed in lieu must be voluntary, e) for a short-sale, the seller must have a hardship, f) the house must be priced reasonably. This list is by no means exhaustive, and I encourage readers who have gone through the process to share their experiences here.

Our residential home has been on the market over 3 months, priced reasonably at 500K. WE owe about 627K on it. We have not paid the mortgage on our home since March 2009. we also own another much smaller home where our 2 sons live. We continue to pay for that mortgage. We have a rental home in another state that is negative earnings and we continue to pay the balance of that mortgage. Our total expenses exceeds our income. what can we do? we are ready to give up our current residence and move to the smaller home with our sons. Should we do a deed in lieu for closure or a short sale?

Foreclosure = bad. Avoid a foreclosure if at all possible. A deed in lieu of foreclosure is less-bad only because the question about the homeowner's deficiency balance is unresolved as a general rule. As the article above states, if the lender is willing to forgive the deficiency balance, or if your residence is in a non-recourse state, then there is little difference between a deed in lieu of foreclosure as compared to a short sale, as a practical matter. Regarding your question, "What can we do?" Obviously, I do not know your family situation, but I wonder why you are paying the mortgage on your sons' house. Shouldn't they pay their mortgage? One solution to your financial situation is to explain to your boys that you cannot afford three mortgages, and they need to take responsibility for their living expenses.

My mother died nearly year ago next November. She did not leave a will and we did not go through probate with her estate, there was nothing left except her house. My brother and sister and I have been paying the mortage on her house, which is still in her name, for this past year. We have recently been unable to pay the mortage and are receiving letters warning of foreclosure (they are addressed to our mother). What options do you see in this situation?

You and your siblings should consult with an attorney in your state who has experience in wills, trusts and estates, or property law. I do not believe you and your siblings violated any laws by not probating your mother's estate in a timely manner. That said, the probate process must occur to dispose of a decedent's assets properly. I can't recall studying any cases in my property law classes that dealt with this issue. My guess -- note my word choice -- is each jurisdiction has answered this question differently, which leads me back to the first sentence in my answer.

Our now former primary residence home in Arizona has been on the market for 14 months. The first (cash) offer was on the table for over five months with the bank. After receiving literally no response on way or the other our buyer retracted the offer. Our second offer which was accepted by the bank was just retracted by the buyer after the inspection period. We moved out of the home two months ago and, as such, the residence is vacant. I am considering pursuing a deed in lieu. First, it is highly unlikely that any lender will approve a note for the short sale amount the bank approved. I'd like to avoid a foreclosure and always thought a deed in lieu was a good option. We lost our mortagage papers (I know) and don't know if it's a non-recourse loan. Should I just let it go to foreclosure or pursue the deed in lieu..any other counsel?

I see no disadvantage for you to pursue either a short sale or a deed in lieu of foreclosure if you are facing a foreclosure.

Bill, I am unable to make payments on my mobile home and have tried every avenue to avoid foreclosure, but I'm afraid it's just not enough. They sent me a Voluntary Surrender form which states the following: "I/We Understand the outstanding balance, any negative escrow and or/legal feels plus accrued interest is now due." It says nothing about the deficiency balance; just says we won't hold them liable for personal property left in the home. Does this sound like it's asking me to be responsible for the deficiency? Do you think it would be better to sign this than to have a foreclosure? We owe $35K on the home but it's work about $50K or so! On the taxes it's valued at $70K even. Should I be worried about the deficiency balance in this scenario? Any advice is appreciated! Thanks, Darla

You did not mention the state where you reside, and your state's laws may be significant to you. Some states, such as California, offer consumers living in mobile homes additional rights that may protect you. Contact your county's bar association and learn the legal aid organization that assists low- and no-income people with legal questions. Make an appointment with the organization, and bring all creditor collections letters, contracts, bills of sale, and loan agreements that you have for your mobile home to your appointment, and let the paralegal or attorney you speak to review them and the form the creditor asked you to sign. I do not see any waiver of a deficiency balance in what you quoted -- to the contrary it requires you to pay the balance due immediately. I am curious, if the mobile home is worth $50,000, and you owe $35,000, why are you surrendering it? Why not sell it, pay off the loan balance, and pocket the rest?

I live in Tennessee. My husband and I filed chapter 7 2yrs ago. We are now facing a divorce and I can not con't to pay the mortgage. The mortgage was included in the bankruptcy. I have never missed a payment or been late on a payment. I want to put the house on the market but the value is much less than we owe. Can I sell the house for less than the loan value or does the bank have to approve the sale price? What options do i have? i do not want a foreclosure on my record after taking the hit of a bankruptcy. Thanks.

As my answer above suggests, contact your mortgage company and ask about its requirements for a short sale or a deed in lieu of foreclosure. Both a short sale or a deed in lieu of foreclosure are good alternatives (from a credit report perspective) to foreclosure.

We are active duty military....after a recent deployment the army moved us from USA to Germany. The move was within a month therefore we did not have time to sell our home and it is now vacant. We lost our housing allowance,I am disabled, have 3 kids in college plus expenses of maintaining a residence both here and in USA...we cannot continue to make the current house payment. I have tried for months to work with the motgage company..we applied for a hardship to lower our payments (we could make a slightly lower payment, $500 less) but they declined...it appears our only options are foreclosure, short sale or deed inlieu. We have good credit but a high debt to income because of 3 kids college loans that we are cosigned for so a refinance is a no go. We are trying so hard to sell the house but the economy is simply not allowing for that. The mortgage company is truly not helpful and we do not trust them. Our insurance has now informed uis that they are cancelling us as well due to the vacant house..and any other insurance we can find is triple the price becasue the house is vacant! We do not qualify for any military help since the base did not close. We are at our wits end. Any suggestions? How long does the deed in lieu take? Should we find a lawyer and let them handle this for us? Thanks Kim

A deed in lieu or short sale must be voluntary and must occur before the homeowner defaults. Talk to your mortgage company about either option now. Deed in lieu of foreclosure and short sale differ in the legal details, but from the perspective of the homeowner both get the homeowner to the same place. Namely, selling the property without foreclosure with a minimal impact on the homeowner's credit rating. You mentioned you do not trust the mortgage company. Be sure to get all promises in writing, and be sure to review all documents you receive from the mortgage company carefully. In my humble opinion, most homeowners have the reading comprehension and knowledge of law to understand short sale and deed in lieu of foreclosure documents if they read them carefully. However, in a case where the homeowner does not trust the mortgage company, I would urge the homeowner to ask an attorney to review these documents before signing them. An attorney's time is not cheap, but if the attorney discovers terms that are not favorable to the homeowner and is able to correct them, it is money well spent.